Perceptions of income

Differences in income and wealth between generations are a mainstay of discussions on intergenerational inequity. These tend to focus on both ends of the age spectrum, with pensioner poverty a key issue highlighted by a number of groups, and wage stagnation among young people and their lack of wealth and assets highlighted by others.

But how do the different generations feel about their income levels? Are there differences in the proportions who feel well-off and poor, and how does this change within generations over time?

The British Social Attitudes survey includes a question that helps us get at this, asking simply whether people would rate their own income as high, medium or low. This focuses solely on income, and so does not capture relative wealth – but it still shows a number of fascinating patterns.

First, on the overall trend, the proportion of the British population counting themselves as “low income” has slightly declined over the last quarter century, while the proportion saying medium income increased. These two responses have effectively mirrored each other almost exactly, as the proportion saying high income has barely shifted (it was 2% in 1983 and 4% by 2009).

There have been significant ups and downs within the period, and these do not map particularly well onto economic growth cycles. However, there does seem to be a relationship with patterns of real wage growth, particularly at the bottom of the income distribution. For example, work by the Resolution Foundation shows that the income for the lowest decile declined in the mid-1990s, reaching its lowest point in 1996, then rose until 2005 after which it declined again – this matches the pattern shown by the low income group fairly neatly.

But this overall picture hides wide generational differences and types of change over time, as we can see in the chart below, which focuses just on those saying they have a “low income”.

One major shift stands out – the changing opinions of their income among generation X. In 1987 generation X were the most likely to say they had a low income at 62% - but by 2006 that level had more than halved to 28%, when they were the least likely to think of themselves as having a low income.

This is a huge change, and will reflect the move from education to employment, and increases in income as careers progressed. As the chart shows, they were aged 18-21 in 1986, but were 30-43 by 2009, when earning potential is much higher.

It is also likely that we can see the end of a similar lifecycle pattern among the baby boomers, where their self-assessment as being “low income” declined throughout the 1980s (there were still some 18 year olds in this cohort in 1983).

Looking across the whole period covered, this baby boomer group are relatively unlikely to feel poor – although this has increased in the last few years. This latest change will reflect the general downward pressure on incomes experienced by most generations since the mid-2000s, but probably also the fact that more of this generation has moved into retirement (12% were retired by 2009, compared with only 1% in 2000).

In contrast, a much greater proportion of the pre-war generation have seen themselves as low income throughout the period. The relative consistency of this line is very interesting and somewhat surprising, given the big employment status changes this group have been through over the period.

In 1983, only 26% of this pre-war cohort had retired, but by 2009 85% had retired. Given that, we might expect a greater increase in the proportions classing themselves as low income.

There are a number of possible explanations why this is not the case. First, we need to remember that the measure is a relative self-assessment and so will be driven by personal expectations as well as how respondents think others are doing.

However, it also seems likely to be related to the stronger pension position for many in this cohort compared with previous generations. Indeed, ONS estimates suggest that real average pensioner income increased by 50% between 1995 and 2011.

But perhaps the key question raised by this analysis is around the income prospects for generation Y. If we can take anything from the experience of generation X, it seems certain generation Y’s view of their income will improve, as they grow older and their careers develop. But there are worrying signs too, when we compare the two generations at similar points.

In particular, at the end of the series in 2009, generation Y are 18-29 years old, and we would expect a large proportion to be improving their income. In fact, the proportion counting themselves as “low income” has gone up, from 53% to 58%. In contrast, the proportion in generation X that said they had a low income decreased by around 10 percentage points between their earliest figures and when they were aged 18-29.

Of course, this pattern will be largely because the economic contexts facing the two generations at these points were very different. Generation Y are just particularly unlucky. They have experienced extended wage stagnation followed by an equally extended economic downturn at a crucial and vulnerable time in their careers.

The susceptibility of younger groups to these downturns seems to be echoed in generation X’s experience in the mid-1990s, when the chart shows they were hardest hit by income declines. They recovered quickly – but it’s not clear generation Y will be quite so lucky. They have already experienced three more years of low wage growth since this data, and that seems likely to continue for some time.

This is reflected in the quite remarkable shift in the balance of low income perceptions between our oldest and youngest. Generation Y are still more likely to think of themselves as having a low income than the pre-war generation. Generation X had overtaken the oldest generation at a similar age, despite the fact that many more of the oldest generation were still working at that point.

Lord O’Donnell talks about “hysteresis” in a previous edition of our research publication Understanding Society, and particularly how the long-term effects of early experiences of unemployment can be very damaging to individuals and the economy. The data here highlights how real this risk is for generation Y, and how important it is to focus policy on supporting them, particularly when, unlike previous generations, they are receiving no help from a rising economic tide.